UK’s Central Bank Fails to Meet Bond-Purchase Target, For First Time

UK’s Central Bank appeared to be unsuccessful in reaching its government debt bond purchase goal of £1.170 billion.

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UK’s Central Bank appeared to be unsuccessful in reaching its government debt bond purchase goal of £1.170 billion.

"In itself, that not that much has been offered is not surprising," said Jason Simpson, UK rate strategist at Societe Generale. "It's a little surprising that this comes on the first week ... it's quite early in the whole process, which will be a worry for the Bank of England."

Meeting the goal

Equivalent to $68 million, the bank failed to buy £1.170 billion in government debt bonds. Investors had only offered £1.118 billion worth of gilts (government bonds) with maturities over the course of 15 years.

The Bank of England recently attempted a reverse auction to buy long-dated debt to make up the £52 million. After announcing interest rate cuts and to recover from the economic effects of Brexit by resuming its Quantitative Easing program (QE) which commenced in 2009.

The Bank’s goal is to buy £60 billion in gilts within 6 months to counter and compensate for Britain’s decision to leave the EU which has slowed down the British economy over the past several weeks.

Darren Bustin, head of derivatives at the Royal London Asset Management stated to The Guardian:

“As quantitative easing was meant to have been a solution for the problems facing the British economy following Brexit, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution.”

Yields go negative

As a result of prices for bonds rising, several bonds have started to experience negative yields. With 20 year, 30 year, 10 year and 5 year yields experiencing record lows. 20 and 30 year yields (GB20YT=RR and GB30YT=RR) dropped 5 basis points in a day.

According to the Bank of England, they stated that they would hold 3 bond reverse auctions each week from now to the end of October with maturities of 3 to 7 years, 7 to 15 years and 15 years plus.

Jeremy Cook, chief economist at World First said that the recent reverse auction “Bond markets over 15 years can be quite illiquid at the best of times so a reverse auction in August will have exacerbated this issue” which could mean the potential success of the next few reverse auctions from now to October.